Trade pattern reversals in time-phased Ricardian systems and intertemporal efficiency

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A timeless Ricardian system specializes geographically to minimize localized labor, just as a timeless neoclassical system specializes to minimize primary factor totals (in a vectoral sense). The steady states of a time-phased system, for zero interest or profit rate, similarly specialize to minimize primary factors. By contrast, when there is a positive interest rate, the observed steady states do not minimize primary totals. Thus, positive profit rates make a system superficially appear inefficient, much like systems with distorting taxes. However, from an intertemporal efficiency standpoint, which goes beyond steady states, it is shown that so long as the profit rates are geographically equal, the observed steady state is Pareto efficient, not Pareto inefficient. In contrast to the Emmanuel view that profit equalization leads to ‘unequal exchange’ and deadweight loss from trade, deadweight loss is shown to come from the absence of international lending markets. The present paper illustrates these truths, works out implications for factor-price equalization or nonequalization, gives conditions of trade equilibrium for time-phased systems, shows their multiplicity, and the possible Metcalfe-Steedman ‘instability’ from the standpoint of the global correspondence principle. A factor-price frontier is deduced, which gives the negative interest rate as a quasi-concave function of the real returns (in terms of any good) of the primary factors, and its well-behaved quantities dual is contrasted with the actual ill-behaved steady-state quantity relation.